A Guide to Building Energy Performance

Building energy efficiency has become an important factor in commercial real estate transactions. A new guide helps assess efficiency and estimate upgrade costs.
Jack Maxwell

A lot of attention is being paid to improving the energy efficiency of gas-guzzling vehicles, the motors that power industrial equipment, and the HVAC systems that keep homes and offices comfortable. The reason? Reducing greenhouse gas (GHG) emissions produced by internal combustion engines, electric power generation, and other sources is seen as a crucial step in reducing society’s carbon footprint and making a cleaner world.

However, there is another major component of the world economy that you might not think of right away when examining strategies to reduce energy consumption: the very buildings we live and work in. Yet by some estimates, this sector accounts for nearly 30% of annual global GHG emissions.

Improving the energy efficiency of commercial buildings — from office towers to shopping malls, multifamily dwellings to warehouses — presents unique challenges. One of the biggest challenges lies in the inefficient systems and equipment found in older structures that will continue to be occupied for decades to come. These structures make up the vast majority of the commercial real estate inventory around the world.

READ MORE: Toward More Energy Efficient Buildings

Architecture 2030 is a non-profit organization whose goal is to “rapidly transform the global built environment from the major contributor of greenhouse gas emissions to a central part of the solution to the climate crisis.” According to their estimates, two-thirds of the world’s total building area will still be in use 30 years from now.

Another issue is that only a tiny fraction of existing buildings are renovated in a given year. Architecture 2030 estimates the number to be just 0.5-1%. And while initiatives such as LEED (Leadership in Energy and Environmental Design), Green Globes, and others are having an impact on new construction, these more efficient structures represent a very small portion of overall building stock. Clearly, improving the energy  usage profiles of older buildings is a worthwhile objective. However, part of the challenge in achieving this goal is that, until fairly recently, buyers and sellers of commercial properties haven’t given much thought to energy consumption. The members of the committee on environmental assessment, risk management, and corrective action (E50) hope their new guide for building energy performance and improvement evaluation in the assessment of property condition (E3224) will change this dynamic. The standard guides energy performance evaluation when buildings change hands, an ideal time to make upgrades, and hinges on the completion of something called a “BEPIE.” Here is the story of this important new standard.

The Role of PCAs

A critical step in any negotiation that involves a commercial building sale is the property condition assessment (PCA). In a nutshell, the PCA’s purpose is to identify any conspicuous physical property deficiencies and compile that information for the buyer to evaluate. It’s similar to a residential home inspection.

The guide for carrying out the ASTM baseline property condition assessment process (E2018) spells out a “reasonable approach” to PCA preparation. The standard was developed by members of the subcommittee on real estate assessment and management (E50.02). First approved in 1999, E2018 has been revised several times and is now widely adopted and routinely used as a guide by industry professionals.

The standard does not, however, include any provisions for capturing energy-related performance data.

Building energy performance can now be included in real estate transations, thanks to a new guide.

One reason PCAs still do not include such data is that “Users and producers have the E2018 standard so dialed in as a standard protocol, and they’re resistant to introducing new concepts to it,” says James Bartlett, senior vice president at Bureau Veritas and vice chair of the subcommittee (which also developed E3224). A second reason is the difficulty in obtaining comprehensive utility data for commercial buildings.

There is some good news on this front, however. Regulatory initiatives in three states (California, New Jersey, and Washington), as well as a number of counties and municipalities around the United States, are making utility data more easily accessible. In many cases, these rules mandate the collection and disclosure of annual energy consumption data for commercial buildings. Bartlett and another member, Anthony Buonicore, hope the result will be more widespread adoption of the new building energy performance and improvement evaluation (BEPIE) methodology at the heart of the new guide.

Energy Disclosure Requirements

Buonicore is chairman of Sustainable Real Estate Solutions and led the task group that developed E3224. He explains how the gradual but accelerating spread of energy disclosure requirements is affecting the commercial real estate market, and how this expansion influenced development of the new standard.

“What happened is that people started seeing this thing called energy disclosure regulation, where you have to actually disclose, every year, your building’s energy performance,” says Buonicore. “And in many of the cities and states, this information could actually get disclosed publicly because the government body wants to give an advantage to those buildings that are performing well and a disadvantage to those that aren’t.”

The competitive implications of this scenario are obvious. Buonicore describes how more and more clients are asking whether properties they’re interested in are subject to such regulations, concerned that the revelation of poor energy performance might lead to higher vacancy rates in office, retail, and apartment buildings, where many leases are “triple net,” requiring tenants to pay for building insurance, maintenance, and real estate taxes in addition to rent and utilities. “They’re worried because tenants, especially millennials, like to see everything green. They’re concerned about climate change, and they want energy-efficient buildings,” he says.

The team that worked on the building energy-performance guide realized that, in order to gain broad acceptance, they needed to design it so that a prospective buyer could use it to evaluate a building’s energy usage profile, see how the building compares with peers, and, if it is using more energy, identify potential improvements that could be made and their cost. These outlays could then be used in price negotiations.

This objective was achieved by proposing E3224 as an adjunct to the property condition assessment, which already requires set-asides for building problems. Deficiencies identified in PCAs — for example, a crumbling parking lot or roof that has to be replaced — serve as bargaining chips in the negotiations between a buyer and seller. They also require a reserve to be established to pay for the work. “Prospective purchasers who are buying a building prefer not to have any money held in reserve because it’s money that is not operating most effectively for you,” Buonicore says.

Subpar energy-consumption data can also be cited by a buyer seeking a price reduction, but with one important difference. “By having our building energy performance guide as a separate standard from E2018, a building’s energy under-performance is not viewed as an E2018 deficiency and, consequently, a reserve does not have to be set aside,” Buonicore points out. “It’s a cost that can be raised with the seller, along with the cost of other deficiencies identified in the E2018 PCA, and for which a price concession may be received.”

But what exactly is subpar energy consumption performance? How do you determine where a building falls in the continuum from very efficient to very inefficient?

Peer Pressure

The subcommittee realized that the only fair way to judge a building’s energy performance was to compare it to peer buildings in the same geographic area or climate zone. BEPIE is the mechanism through which this is accomplished, but the question of where to direct users of the standard for the best comparative data also had to be addressed.

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The answer was to determine which energy usage database covered the broadest array of building types in the greatest number and offered the most robust consumption data. The E3224 task group decided to give users of their standard guide two options: the U.S. Department of Energy’s Building Performance Database (BPD) or the U.S. Environmental Protection Agency’s Energy Star database.

Buonicore and his colleagues lean toward the BPD because it provides information on a much larger number of commercial buildings and is updated continually. He also notes that the BPD gets its data from those cities that have public disclosure, and it offers other advantages as well. “It allows you to go in and evaluate your type of building in the geographic area that you want, and it looks at all the buildings, evaluates them statistically, and gives you the results. Plus, it’s free to use,” he adds.

The next question was how to use the BPD information to establish the energy performance of peer buildings. The task group decided to identify peer-building performance as the performance at the 50th percentile, or median.

“We’re looking at the midpoint, not the average, because the average can be influenced by unusual performance on either end,” says Buonicore. “This was a significant determination because there was no definition anywhere of what constitutes peer-building performance. So we’ve defined it in E3224.”

Approval to Acceptance

Getting a new ASTM International standard approved and published is only the beginning. The next step is getting the word out and convincing stakeholders of its value. “Having a standard passed is useless unless you get it incorporated and used in the industry,” Buonicore says.

The companies that finance commercial real estate transactions are one key constituency. “From the lender standpoint, property condition assessments are a tool to evaluate our risk,” asserts task group member Damian Wach, saying this guide is “more a tool to evaluate the opportunity for greater energy efficiency. For a lender, that’s actually less of an issue. Certainly for an owner it’s a much bigger deal.”

Nonetheless, Wach, a vice president with Prudential Financial subsidiary PGIM Real Estate Finance, feels the BEPIE energy performance benchmarking information could prove useful to lenders who wish to incentivize borrowers to improve their properties. “When we do our PCAs before we close a loan, we just add this feature, this second standard, onto that, and that becomes a benchmark for what energy performance they have,” he says. “And we can measure that a year later to see if they’ve achieved the stated goal. It could be very valuable.

“It’s going to be somewhat of a challenge to get lenders to use this standard, but I think they will,” Wach continues. “I know we will at PGIM.”

PCA consultants represent another stakeholder group whose buy-in will contribute to the success of E3224. Bartlett believes energy disclosure requirements will push his colleagues in that direction.

“In order for providers like us to go out and adopt a new standard and develop new products around it, there has to be a compelling demand driver,” Bartlett says. “Third-party consultants are typically pretty reactive. Once a user group with a forecastable transaction volume starts requiring the preparation of a BEPIE in addition to a standard PCA, national firms like ours will mobilize to meet that demand. Now that there’s a published standard with a methodology that will be recognized by those users, agencies, or regulatory authorities as meeting their performance-disclosure requirements, we’ll have a solid driver and a level playing field.”

Buonicore agrees that energy-disclosure regulations will help drive more widespread use of the energy-performance guide. He also feels the relatively low investment required for a BEPIE conducted as an adjunct to a PCA is another reason for optimism, though he acknowledges there will be a learning curve for everyone.

“It has to happen, it’s just going to take a little bit of time because people don’t know what a BEPIE assessment is and how it’s done,” Buonicore explains. “It has never been defined before.”

Another factor is that the guide to conducting PCAs will reach the fifth year of its seven-year balloting and revision cycle in 2020, where updates and references to new standards are deliberated by the task group’s balanced membership. In Bartlett’s view, the PCA standard’s revision process will provide an excellent opportunity to increase awareness and accelerate adoption of the new BEPIE standard. 

“All ASTM standards must be balloted for reapproval, revision, or withdrawal within five years of their last approval date,” he notes. “The E2018 task group will be working to achieve consensus on changes to the guide over the next two years, including the important new references to the E3224 standard.”

Buonicore is confident that when real estate professionals, lenders, and building owners begin to see the benefits of including a BEPIE as part of their due diligence, it will gain traction. 

“Once they’ve been made aware and then see what the advantages are, then the standard becomes real, because they just tell their consultants: ‘I want the E2018 PCA, and I’d like you to add E3224 as an adjunct to it.’ That’s what’s going to take time.”

Jack Maxwell is a freelance writer based in Westmont, New Jersey.

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